Thoughts On The Alternative Budget

This is even later than my thoughts on the official budget (this was supposed to have been published two days ago), even though Pakatan’s budget proposals came out a day earlier.

I’m not going to do a head-to-head with the “official” budget – the two are very different animals, and any comparison will not be fair. Pakatan does not have full access to the minutae of government operations, and as such will not have the kind of detailed expenditure breakdown that the official budget does. I take it for what it really is – a policy platform, akin to a political manifesto.

Having said that, I think this budget is probably more “realistic” than in previous attempts. There’s some long discussion of the basis of the budget estimates, which is much more than can be said of previous alternative budgets. That adds a layer of confidence in those estimates, especially since the estimated savings from plugging “leakages and wastage” is a lot more conservative than the blanket “we’ll save 20%-25%” of the overall budget that was used heretofore.

If I have a criticism of this, is that such discussions are better left to an appendix, not in the main text. Another criticism would be the estimates for development expenditure – I feel like a broken record, but development expenditure is determined by the allocation under the each Malaysia Plan. There is no “trend” involved. Trying to estimate development expenditure based on the ratio to operational expenditure isn’t likely to yield realistic estimates. By the same token, criticising the level of development expenditure is an exercise best left to when the Malaysia Plans are actually formulated, not at Budget time. I have a few more minor quibbles (CPI inflation is NOT a good proxy for the GDP deflator), but that would taking nit-picking a bit too far.

Overall

Pakatan projects revenue collection to increase to RM242 billion on the following basis:

1. Maintain the existing SST, with capital gains tax and inheritance tax on top (+ RM3 billion)
2. Improving revenue collection (+ RM1 billion)
3. Auctions of federal land and licenses (+ RM3 billion)
4. Lower Petronas dividend (- RM2 billion) of RM25 billion for 2015, to be gradually reduced to RM20 billion

Total expenditure on the other hand is at RM273 billion:

1. Savings on supplies and services (- RM4.5 billion)
2. Reducing the role of the PM’s Dept (- RM7.5 billion)
3. Reduction in funding for various programs, consolidation of various agencies, cuts for NTP programs (- RM600 million)

How realistic are all these measures? Off hand, I’d say they’re doable. You can ALWAYS cut programs you don’t want to spend money on. It’s really a matter of choice whether you want to continue with some things or not. That’s really a philosophical and political question, not an economic or financial one.

One thing I’m mindful of is the difference between government as defined politically, and government as an institution. They’re not the same thing. That’s why I’m doubtful of the level of “savings” from reducing leakages, wastage and corruption. It’s far more likely that what you’ll would end up having to do is outright cuts in programs and expenditure, rather than savings from improved efficiency. It’s the nature of government to be wasteful and inefficient (and I say that without any moral judgement at all – I don’t think the government really needs to be shrunken), and the only real way to crimp government expenditure is to reduce the amount and level of services that the government actually delivers to the economy.

Budget Proposals

As for specific measures, my comments as follows:

1. Capital Gains Tax – I’ve always been in favour of a CGT, but not as a replacement for GST, and certainly not as an adjunct to the highly inefficient and distortionary SST regime. The biggest issue with CGT is that it is inherently volatile and VERY pro-cyclical i.e. it rises in a boom and drops like a stone in a bust. It’s most useful purpose is like its property counterpart, the RPGT – you use it to limit speculative excess and income inequality. It frankly sucks as a revenue raiser. Another point to consider – much of the trading (and capital gains thereof) on the Bursa Malaysia is by institutional funds who invest on behalf of the public, like EPF, PNB, LTAT, KWAP, LUTH, etc. etc. We don’t have a market that’s dominated by individual investors. Raising capital gains tax on these funds is equivalent to reducing the dividend yield for many Malaysians, and applying the same tax rate on someone with RM500 in savings as someone with RM500,000 in savings. So there’s some implementation issues here.
2. Inheritance tax – Pakatan proposes a RM5 million threshold. That’s probably too high and limits the eligible tax base, which means this won’t earn a whole lot of revenue either. A further criticism – I’d prefer an estate tax to an inheritance tax (tax liability on the estate of the deceased, rather than on the beneficiary), as that’s more effective in limiting transmission of wealth and assets across generations. As a total aside, guess which Finance Minister proposed the abolishment of Malaysia’s estate duty regime (yes, we had one before)?
3. Reform of Petronas governance – Personally I don’t know if these measures make sense, it’s not my field. Any readers care to comment?
4. TPPA – this is quite frankly not a budget issue
5. Living wage – expanding the role of the NWCC and using a tripartite plus system sounds promising; based on the German system? But it will require quite a bit of a mindset change, especially in the private sector. But if we can get that, than its a step in the right direction.
6. Affordable housing – Seriously, DIBS? And credit guarantees? Like the Youth Housing Scheme proposed by the government, this is treating the symptom, not the disease. How about reducing zoning restrictions and conversion premiums in PR controlled states? How about actually allowing some low-cost housing and flats developments to be started? Difficulty in financing is just a consequence of the real disease – a sharp drop in incoming supply since 2008.
7. Rural development – some nice ideas, and one truly brainless one. Focusing on satellite cities (existing economic agglomerations) is something I fully agree with, because that would give maximum bang for the buck. I do question how different this is from existing rural development programs under the existing government. The brainless idea? Appointing PNB as a “federal investment company” to, of all things, transform agriculture. First, PNB isn’t even government owned, much less a government agency. Second, having worked there for more than a third of my career, I know very well what they can and can’t do. Agriculture and rural development isn’t even a peripheral competency at PNB. Third, this would impose an objective that would conflict with PNB’s primary mission, which is to deploy Bumiputera and Malaysian savings for maximum domestic control and investment returns in the Malaysian corporate sector. Felda is a much more natural fit for this kind of thing than PNB.

I know the above sounds a bit critical, but for all that, I think this is probably the best effort at an alternative budget yet. There’s at least some rationale behind the numbers, and there are specific proposals towards addressing policy objectives instead of the vague promises that characterised previous alternative budget attempts.

Technical Notes:

Pakatan Rakyat Alternative Budget 2015